Sat, 25th March 2017

Anirudh Sethi Report


Archives of “Forex” Category

Emerging Markets -An Update

  • Reserve Bank of India will introduce a new monetary policy tool.
  • Moody’s raised the outlook on Russia’s Ba1 rating from stable to positive.
  • Fitch cut Saudi Arabia’s rating a notch to A+.
  • Moody’s cut the outlook on Turkey’s Ba1 rating from stable to negative.
  • China has temporarily suspended beef imports from Brazil.

In the EM equity space as measured by MSCI, Russia (+2.0%), Colombia (+1.8%), and Chile (+1.5%) have outperformed this week, while Poland (-2.8%), Hungary (-2.0%), and Brazil (-1.3%) have underperformed.  To put this in better context, MSCI EM rose 0.3% this week while MSCI DM fell -0.9%.

In the EM local currency bond space, Hungary (10-year yield -22 bp), Poland (-17 bp), and Mexico (-15 bp) have outperformed this week, while Argentina (10-year yield +38 bp), the Philippines (+11 bp), and Czech Republic (+6 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 8 bp to 2.42%.
In the EM FX space, ZAR (+2.0% vs. USD), MXN (+1.0% vs. USD), and KRW (+0.8% vs. USD) have outperformed this week, while BRL (-1.2% vs. USD), EGP (-0.6% vs. USD), and HUF (-0.5% vs. EUR) have underperformed.

Rand hits strongest level since August 2015 as dollar slide boosts EM

The rand was one of the biggest emerging market beneficiaries of the dollar’s slide on Monday morning, hitting its strongest level since August 2015.

Higher interest rates in the US are usually bad news for EM currencies, as they increases investors’ return from relatively safer American assets, but last week’s rate rise was accompanied by less hawkish than expected comments on the speed of future moves, sending the dollar on its longest losing streak since before the US election.

The buck’s slide prompted the best week for EM currencies in six weeks last week, and helped bring the MSCI Emerging Market stocks index to its highest level in almost two years.

USD weakness (small) persists in Asia

Ranges have been small so far for the Asian opening to the forex week.

Net, though, it’s a story of USD weakness, with currencies up pretty much across the board.
  Cable is the laggard, EUR, CHF, NZD, AUD, yen all a little stronger, GBP/USD barely changed

Dollar’s Technical Tone has Deteriorated

The failure of the Fed to signal an increased pace of normalization and the prospects of other central banks raising rates spurred dollar losses, which deteriorated its technical outlook. 
The Dollar Index has been sold through the 61.8% retracement (~100.40) of the rally since February 2 low near 99.25.   If the 100-level is breached now, a return to the early February low, looks more likely.
That 99.25 area is very important from a technical perspective.  It corresponds to a 38.2% retracement of the rally since last May’s low and it is also a neckline of the old head and shoulders pattern.  The measuring objective of the head and shoulders pattern is near 94.75, which is just above the 61.8% retracement of the rally since last May’s low.  The five-day moving average is below the 20-day average for the first time in a month.  Technical indicators are also aligned favoring the downside. 
The euro appears set to test the early February high near $1.0830, which also corresponds to the 50% retracement of the losses since the US election (~$1.0820).  The spike from the December ECB meeting was near $1.0875.  The 61.8% retracement of losses since the US election is roughly $1.0935.  Technical indicators favor additional gains, though the proximity of the upper Bollinger Band (~$1.0750) may deter new aggressive buying before a pullback. 

Euro hits six-week high after Nowotny hints at rate hike

Nowotny tells Handesblatt rate increase may be on the way

I’m still a bit skeptical on this exact comment. He definitely said that the deposit rate may rise before the main rate and that hikes could come before the end of QE. That’s definitely hawkish.

But there’s also a report that he said a rate increase may be on the way but I want to see the context because others aren’t reporting it. I’m trying to track down exactly what he said but, either way, it’s a hawkish shift and the climb in the euro is the right move.

Technically, there isn’t anything standing in the way of a return to 1.08. What’s really on my mind is if this is the start of a return to 1.15 or 1.40 in the longer term.

This isn’t exactly a classic bottoming pattern but they come in all shapes.


People’s Bank of China sets yuan reference rate at 6.8988 (vs. Friday at 6.9123)

USD/CNY central rate

  • The ‘onshore’ USD/CNY rate is permitted to vary plus or minus 2% from this point for the day
  • The offshore USD/CNH can do whatever the heck it likes
OMOS .. yes, PBOC back conducting them today
  • To inject 10  bn yuan through 7-day reverse repos
  • To inject 10  bn yuan through 14-day reverse repos
  • To inject  10 bn yuan through 28-day reverse repos  
On Friday the yuan rate against its basket was set at 94.23
  • From 94.28 the previous Friday

Market Doubts of Three Fed Hikes This Year Caps Dollar

Bringing forward expectations of a Fed hike from May-June to March was worth something for the dollar, but to get more now, the market may need to recognize the risk of three (or more) hikes this year.  With the strong February jobs growth and a 2.8% year-over-year increase in hourly earnings, rarely does the market’s confidence in an event surpass current expectations for a hike on March 15.
However, the market sees around a one-in-three or a one-in-four chance of a third hike this year. The risks for the updated forecasts from the Federal Reserve seem asymmetrically tilted higher, more rate hikes than fewer by more members.  The hawkishness of regional presidents may be underestimated.  The data and the global climate are conducive for expediting the normalization process.  The hawks will likely feel vindicated by recent developments and may press their case with more vigor.
The focus of the Fed has arguably shifted.  Previously, the issue was whether the data would confirm that the economy was evolving toward the Fed’s targets.  It did.  Rather than focus on the data points per se, officials appear more confident of the direction and resilience of the economy and prices.  They now are looking for opportunities, which helps explain the campaign to prepare the market for the March 15 move.
Still, the dollar’s technical tone has deteriorated, and the risk is on the downside over the next several sessions.   Our working hypothesis is that the dollar’s recovery that began in early February against most of the majors ended and a correction has begun,   For the Dollar Index, this means potential toward 100.75 and possibly 100.40.  The former is the 50% retracement of that rally and coincides with the 100-day average (~100.80). The latter is the 61.8% retracement.  Alternatively, if the Dollar Index has carved out a double top near 102.25, the neckline is around 101.20 (38.2% of the rally is ~101.10).  On a break of the neckline, the measuring objective is 100.
The euro’s pre-weekend rally saw it surpass the 50% retracement objective of its decline from the February 2 high near $1.0830.  That retracement was around $1.0660, and the 61.8% retracement is closer to $1.0700.  The euro’s five-day moving average crossed above the 20-day average for the first time in a month.  The single currency may be tracing out a double bottom at $1.05  The neckline is $1.0630.  The measuring objective is around $1.0760.

EUR/CHF hits the highest since December 8. Mystery abounds.

EUR/USD up almost 100 pips today

Here is one theory:

The Eurozone economy is out of the deflationary-crisis mode. Draghi drove down government borrowing costs and the economy is beginning to turn the corner. In addition, yesterday he signaled that policy is shifting towards neutral.

Here is another theory:

Eurozone political risks are as high as ever. There is an election on Wednesday on the Netherlands that will almost certainly end in gridlock. That will be followed by a vote in France at the end of April where one of the leading candidates wants to quit the euro.

On top of that, sight deposit data shows recent SNB intervention. FX holdings at the central bank were up 3.8% in February, the biggest rise since December 2014.

A third theory:

The SNB is preparing to do more, in the form of cutting rates deeper and the insiders are getting their money out of franc.

The market is laser-focused on the Fed decision on March 15, but about 14 hours later, the SNB decision could steal the show

Euro climbs to 3-week high against dollar on rate speculation

The euro climbed to its strongest level against the dollar since mid-February as the markets reassessed the odds of a December rate rise by the European Central Bank.

A day after mildly hawkish comments from European Central Bank president Mario Draghi helped send the single currency higher, the euro tacked on another 0.9 per cent to hit a three week high of $1.0673 following a report that the ECB had discussed whether rates could rise before it ends its bond buying programme.

However, two people familiar with the discussions denied there had been any meaningful debate over the issue. One person said some members are keen for the council to consider raising the deposit rate, now at minus 0.4 per cent, before it ends its quantitative easing programme.

Against the pound, the euro was up 1 per cent at €1.1393 – a level last seen in mid-January. The currency also firmed more than 1 per cent against the Japanese yen at 122.83.